June’s tech sector blood bath bodes ill for growth investing comeback

Given the importance of Japan in supplying high tech materials and equipment, we think last month’s plunge in shares of related names which gathered more momentum last week is worth exploring. Since Q4 of last year, we have argued that shortages in semiconductors which had led to over-ordering components in the past year will likely come back to haunt the sector while surging inventories which had become particularly notable in Q1 could lead to a major retrenchment in bookings once end-demand slows. 

To be sure, sales of consumer electronics, smartphones, PCs and peripherals along with sales of other durable goods have shown continued weakness in the past quarter. Although Chinese lockdowns are partly to blame for this demand pull, we think surging inventories, partly a reflection of ‘just in case’ supply chain management strategies of the past year could further accentuate this downturn for the rest of the year. 

Indeed, replacement demand look to have become all but exhausted during booming sales of the pandemic-led lockdowns of the past two years. With inflation now eating into consumer spending budgets, just as recent outlays have swung more towards travel and leisure, falling end demand for gadgets is finally transpiring into weaker earnings for key technology firms. 

Although much weaker earnings outlook from Micron last week shouldn’t have come as a major surprise given plunging memory chip prices this year, its curtailed capex program did underline the oversupply problems the sector is suddenly facing. Latest reports that even the mighty TSMC has seen orders being pruned by its major customers added more worries about the near-term outlook as utilisation rates of even foundries look to be coming under pressure.  

With growth stocks having lost one key engine that propelled their rerating since 2019, and technology names are suddenly viewed as highly economic sensitive as they have been historically, hopes that growth investment strategies could make a meaningful come-back in the near term have been severely dashed in our opinion. As noted last week, we think the coming earnings season is unlikely to provide much support for stock markets and judging by last week’s sell-off, particularly in tech names, we think potential for negative surprises continue to leave the sector vulnerable to further deratings.